According to this article Nike has come up with an ambitious 5 year strategic growth plan. Their aims are among others to:
- Double profits by 2015
- 40% revenue growth by 2015
- Double sales in the Action Sports category, currently $390M (more on that in the next log)
On March 5 Véronique Adam wrote an article about Adidas on seekingalpha.com claiming it to be fully priced and without an upside (short term I guess). Nike and Adidas compete head to head on almost all markets and therefore the question arose: Why the different outlook?
In another article Ms. Adam compares the three big ones, Nike, Adidas and Puma:
“Where does Nike stand from a profit margin standpoint? YTD Gross margin at 45.9% is in line with Adidas (45.4%) but 5.4 points lower than Puma (51.4%). Puma is more exposed to lifestyle apparel than Nike, where pricing is better. However, Nike’s control over selling and administrative expenses looks much better than peers, enabling it to achieve 13% operating margin, in line with Puma.”
So Nike seems to be a bit more profitable than Adidas, but to achieve these goals it has to be even more profitable. Does it add up?
- To increase revenue by 40% in 5 years, Nike will have to grow by 7% a year on average
- Nike’s net profit margin is 9.26% ($1.7 B). To double their profits in 5 years the net profit margin will have to be 12.2%
- Adidas generates about $4.57 of free cash flow per share compared to Nike’s $2.64 per share (very roughly estimated)
Conclusion: In order to achieve these goals, Nike would have to gain relative market share from its competitors as other companies controlling high market share are estimating growth at around 2-4% (VF Corp, Adidas). Adidas seems undervalued compared to Nike.